A commodity is a raw material or agricultural product such as grains, gold, beef, oil and natural gas that can be widely bought and sold across global markets. In general, there are two types of commodities—hard and soft commodities, classified by their predicted life span.
Hard commodities include iron, crude oil, gold and silver. Soft commodities generally include agricultural products such as rice or wheat. Recently, however, the definition has expanded to include a variety of financial products such as foreign currencies.
A commodities market occurs when manufacturers of a commodity want to sell their goods at a given price and speculators enter trade markets in order to aid the process of transferring goods and gaining profit. Currently, there are approximately 100 listed primary commodities.
Financial transactions involving commodities generally take place through the form of futures contracts, which is a contract to buy or sell an asset at a future date, making standardized payments, generally on a monthly basis. The first commodity transactions involving futures contracts were those of the Dojima Rice Exchange in Japan that began in the 1730’s. In the US, the Chicago Board of Trade (CBOT) listed the first known standardized exchange traded forward contracts in 1864.
Commodities are traded globally through exchanges, such as the venues of the CME Group, NYSE Euronext, the IntercontinentalExchange and the London Metal Exchange.